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MFA Financial Is a Cheap Stock That May Be Worth Buying

Investors who like low stock prices, and there are plenty of them out there, may want to give MFA Financial (NYSE:MFA) a look. That’s because MFA stock may be a rare example of a name with a puny price tag that could actually be worth investors’ time and capital.

Toy houses rest atop stacks of coins while a hand dangles a set of keys in the air.

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Those who regularly read my pieces, whom I greatly appreciate, know that I mostly unabashedly deride low-priced stocks. The reason I do so is that stocks arrive at small prices solely for negative reasons.

Indeed,  MFA stock has experienced some negativity this year. It closed at $2.93 on Oct. 23, but its 52-week high is $8.09, meaning the name needs to more than double to get back to that high. Moreover, it’s up more than 900% from its March low, perhaps implying that further gains could be limited or take more time to materialize than some investors are willing to commit.

MFA’s 2020 woes are particularly confounding, considering the company is a mortgage real estate investment trust (mREIT). Like so many REITs, those of the mortgage variety are sensitive to changes in interest rates. Consequently, MFA should benefit from today’s historically low rates.

MFA Stock Can Shake its Woes

For a substantial portion of this year, MFA’s price action has indicated that short-term interest rates will rise. That’s a troubling scenario for mREITs because they exploit the arbitrage spread between short- and long-term interest rates. In plain English, MFA isn’t a good name to own when short-term rates are rising faster than long-term rates.

Fortunately, the Federal Reserve isn’t raising borrowing costs anytime soon. Most believe that the central bank probably won’t consider rate hikes until 2023. The Fed’s would likely implement a surprise rate hike only if there is an unexpected spike in inflation, but data don’t suggest that scenario is imminent.

The likely problem for MFA stock this year is mortgage refinancings – borrowers taking advantage of lower interest rates to lock in lower monthly payments on their mortgages. As MFA’s price action suggests, that’s problematic for the mREIT, but there’s a silver lining.

Not only the price of MFA stock is cheap, but its valuation is, too. The latter is obviously more important. The book value of the company’s loans is $4.46 per share. As a result, MFA stock would need to gain 52% from its Oct. 23 close to reach its book value. Some famed investors extol the virtues of buying stocks that are trading below their book values.

“Famed investors like the late Benjamin Graham used book value as a gauge of liquidation value. Buying a stock below book can provide what Graham called a ‘margin of safety,’” according to NYU’s Stern School of Business.

Another Point in MFA’s Favor

One of my other quibbles with low-priced stocks is that they sometimes have high, potentially unsustainable dividend yields.

Since its dividend yield is 7.12%, MFA qualifies as a high-yield name. There’s no doubt about that. And MFA previously missed a dividend payment and cut its payout. That could be a recipe for disaster for any stock.

However, the mREIT recently restructured its payout to a more sustainable level. In fact, with the company profitable, its balance sheet improved and its negative dividend news out of the way, MFA could, at some point, resume raising its payout. It had a history of doing that prior to this year.

The bottom line is that it’s not often investors can find a sub-$3 stock trading at a steep discount to book value with a 7% yield with room for dividend increases. MFA offers all that.

On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Todd Shriber has been an InvestorPlace contributor since 2014.

Article printed from InvestorPlace Media,

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